With the 10-year U.S. Treasury yield approaching 3%, hedge fund is betting that U.S. bond prices will fall further.
The latest data from the U.S. Commodity Futures Trading Commission (Commodity Futures Trading Commission) shows that at the end of May, leveraged funds were net short U.S. Treasury bonds. This is the first time they have gone short since January 2021. This may suggest that the U.S. 10-year Treasury bond yield may continue to climb above 3%.
Facts have proved that the 3% level is a "psychological threshold" that is difficult to break through for the 10-year U.S. bond yield. The rate climbed above this threshold in early May before falling back on May 18. Last week, following the release of strong employment data, the rate was close to that level again, now at 2.96%.
At present, the risk of U.S. bond yields is biased upward. According to media surveys, the U.S. CPI data for May released this Friday is expected to increase by 8.3% year-on-year, which will be the same as the inflation rate in April, which was the highest in four decades. In addition, the European Central Bank is expected to signal a rate hike at this week's meeting, while the Russia-Ukraine crisis is helping to push up prices of oil and other commodities.
Prashant Newnaha, interest rate strategist at TD Securities in Singapore, said that the Fed will pause raising interest rates in September may be "cold water poured on" this week. He pointed out that Atlanta Fed President Bostic had hinted that it might be reasonable for the Fed to pause raising interest rates in September. Higher oil prices, the European Central Bank's hawkish meeting, and higher-than-expected U.S. CPI data for May may push the U.S. 10-year Treasury yield to exceed the 3% mark this week.
Futures markets are now fully pricing in 50 basis points of rate hikes by the Fed at its June and July meetings, but only a further 40 basis points of tightening is expected in September. The outlook highlights concerns that the central bank may have to risk an economic slowdown to control inflation. This concern has also stimulated a rebound in U.S. bond prices, with the 10-year U.S. bond yield falling as much as 50 basis points from this year's high of 3.20% set on May 9.
Some analysts also hold different views on U.S. debt. Morgan Stanley said in a recently released research report that the market has now passed the worst period when inflation and policy surprises affected the market.
Morgan Stanley chief cross-asset strategist Andrew Sheets predicts that U.S. bond yields will stabilize this summer and reduce interest rate volatility, which will help mortgages, municipal bonds and investment-grade corporate bonds. He said:
The worst decline in the U.S. bond market may be over. After U.S. Treasuries suffered their largest decline on record in the first three months of this year, the bond market has priced in most of the impact of future interest rate hikes by the Federal Reserve, making bond market valuations more attractive.
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